M19_RUGM_6563_05_PPW_CH19

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Slide 19.1

Chapter 19

Emerging economies

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.2

Emerging Economies

• Objectives

• Introduction

• Triad firms and emerging economy firms: why the mutual interest?

• An overview of emerging economies, by region

• Shifting patterns of comparative and competitive advantage

• Market access to the triad

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.3

Objectives

Examine

the relative attractions, opportunities and threats in the triad regions and emerging economies for firms looking to internationalize.

Explain

how many emerging economies are becoming more integrated into the global economy, in terms of trade, FDI and other forms of interaction and interdependence.

Understand

the nature of the new multinationals from emerging economies, as collaborators and competitors.

Examine

the implications of changes in emerging economies for MNE managers in terms of new strategies and organization structures.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.4

Introduction

• Emerging market countries are:

– Growing in importance for international managers for both market-seeking investments and resourceseeking investment.

– Strongly government-controlled, in that government agencies play a central role in negotiating with foreign investors and deciding the local rules of the game.

– Less predictable and riskier than triad markets, which investors often underestimate in their pursuit of the high level of rewards on offer.

– The source of new competitors, as local firms move up the value-chain, becoming more sophisticated and more international.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.5

Types of international expansion

• There are two types of international expansion that are important in relation to non-triad firms:

– internationalization from the triad into non-triad regions;

– the internationalization of newer MNEs from outside the triad who are looking to access larger economies.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.6

Triad firms and emerging economy firms: why the mutual interest?

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.7

Triad firms and emerging economy firms: why the mutual interest?

• For triad-based MNEs:

– Triad economies are growing slowly relative to emerging markets both large, like India, China and

Brazil and small, like Poland or Malaysia

– Triad regions also tend to be more expensive, in terms of labour costs, infrastructure, land, materials and supporting industries, relative to nontriad regions.

– As a result, there are strong incentives for triadbased firms to:

 sell products, services, and other outputs into these growing, non-triad markets;

 to source inputs, from cheap labour or manufactured components to services, from such places.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.8

Triad firms and emerging economy firms: why the mutual interest? (Continued)

• For non-triad-based MNEs:

– Large, mature markets like the US, the EU and

Japan offer opportunities to sell their products.

– Many firms also look to these countries to fill gaps in their assets, resources and capabilities, from technological know-how or specialist components, to brands.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.9

Figure 19.1

What is the attraction for triad and nontriad firms investing in each other’s home regions?

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.10

An overview of emerging economies, by region

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.11

Table 19.1

FDI inflows, by host region and economy, 1980

–2005 (millions of dollars)

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.12

Table 19.1

FDI inflows, by host region and economy, 1980

–2005 (millions of dollars)

(Continued)

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.13

Table 19.1

FDI inflows, by host region and economy, 1980

–2005 (millions of dollars)

(Continued)

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.14

Table 19.2

FDI from developing countries, 1980

–2005 (billions of dollars)

Source

: UNCTAD,

World Investment Report,

2004 (Geneva: UNCTAD, 2006), at www.unctad.org

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.15

Table 19.3

The top 50 non-financial TNCs from developing economies ranked by foreign assets, 2005 a

(millions of dollars, number of employees)

Source

: United Nations,

World Investment Report

, 2006 © United Nations 2001, 2006, 2007 www.unctad.org/wit

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.16

Table 19.3

The top 50 non-financial TNCs from developing economies ranked by foreign assets, 2005 a

(millions of dollars, number of employees) (Continued)

Source

: United Nations,

World Investment Report

, 2006 © United Nations 2001, 2006, 2007 www.unctad.org/wit

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.17

Table 19.3

The top 50 non-financial TNCs from developing economies ranked by foreign assets, 2005 a

(millions of dollars, number of employees) (Continued)

Note: a b

All data are based on the annual reports of TNCs (MNEs) unless otherwise stated.

TNI, or “Transnationality Index,” is calculated as the average of the following three ratios: foreign assets to total sales, foreign sales to total sales, and foreign employment to total employment.

d

Industry classifications for companies follows the US Standard Industrial classification as used by the US Securities and Exchange Commission f

(SEC).

e

In a number of cases, companies reported only partial foreign sales. In a number of cases companies reported sales only by destination.

Foreign sales are based on the origin of the sales. In a number of cases companies reported sales only by destination.

g

Foreign employment data are calculated by applying the share of foreign employment in total employment of the previous year to total employment of i

2006.

h

Foreign assets data are calculated by applying the share of foreign assets in total assets of the previous year to total assets of 2006.

Foreign sales data are calculated by applying the share of foreign sales in total assets of the previous year to total sales of 2006.

j

Data were obtained from the company in response to an UNCTAD survey.

l m

Data for foreign activities are outside Asia.

Foreign employment data are calculated by applying the average of the share of foreign employment in total employment of all companies in the same industry (omitting the extremes) to total Employment

Source

: United Nations,

World Investment Report

, 2006 © United Nations 2001, 2006, 2007 www.unctad.org/wit

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.18

Asia-Pacific and the Middle East

• Receive 22% of global FDI flows, the most of any non-triad region.

• 90% of FDI is concentrated in only 10 countries.

– China, Hong Kong (China) & Singapore receive the most FDI.

– The oil rich countries of the Middle East also experience FDI, but this is almost exclusively related to their oil industries.

• Many of the countries in the region continue to liberalize their economies and privatize stateowned assets.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.19

Asia-Pacific and the Middle

East (Continued)

• There are two clear trends that indicate the dynamism of the Asia region.

– The growth on intra-regional investment, particularly driven by the regional giants India and

China joining countries like Malaysia, South Korea,

Taiwan and Singapore as active investors.

– FDI in services is growing rapidly and now represents over 50% of FDI stock in the Asia region.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.20

MNEs from Asia Pacific

• 36 out of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from the Asia-Pacific region.

– The largest number from any country comes from

Hong Kong (China), for example, Hutchison

Whampoa (Hong Kong)

– Others from the region include Singtel (Singapore);

Petronas (Malaysia); Samsung Electronics (South

Korea); etc.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.21

Central and Eastern Europe

• Despite years of political and economic change, including liberalization, the Central and Eastern

European region still attracts a relatively small percentage of global FDI inflows (just over 4%).

• Poland, the Czech Republic and Hungary receive larger shares of FDI than other countries in the region but have experienced declines in recent years, as has the Russian Federation.

• These, plus 5 other CEE countries (Estonia, Latvia,

Lithuania, Slovenia and Slovakia) joined the EU in

May 2004 and all saw FDI inflows shrink recently, but prospects look better from now on.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.22

MNEs from Central and

Eastern Europe

• The largest MNEs in the CEE region are Russian, many of them based on the country’s abundant natural-resources, such as Gazprom, Rosneft and

LuKoil.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.23

Latin America and the Caribbean

• 11% of global FDI went to the Latin America region in

2006.

• The three largest economies of Argentina, Brazil and

Mexico had a difficult decade in terms of economic growth and recession, which stymied FDI inflows.

• A spate of privatizations during the late 1990s boosted inward FDI for these and other regional economies and as this process came to an end, so did the FDI inflows.

• Brazil and Mexico still received the highest amounts of FDI and, as we would expect, one-third of all FDI into the region came from the USA.

• Many Latin American countries now face increased competition for US manufacturing investment from China and the Asian region.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.24

MNEs from Latin America

• 8 of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from the Latin American region.

– Half of them are based in Mexico.

• Many of the largest are natural resources based.

– These include the largest of all, Cemex (Mexico),

Petrobras (Brazil), Companhia Vale do Rio Doce

(Brazil), Metalurgica Gerdau (Brazil) and Perez

Companc (Argentina).

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.25

Africa

• Less than 4% of total global FDI goes to Africa.

– Resource-rich economies (oil, diamonds, gold and platinum)

• Home to most of the world’s least-developed countries (LDCs).

• Africa has always recorded low levels of inward

FDI because of its relative lack of political instability, weak infrastructure, poor labour skills and macro-economic fragility.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.26

MNEs from Africa

• Only 5 of the 50 largest non-financial MNEs from developing countries listed by UNCTAD are from

Africa and they are all South-African.

• Sappi, Sasol, MTN Group and Barloworld are major players in their respective sectors throughout the region.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.27

Shifting patterns of comparative and competitive advantage

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.28

Shifting patterns of comparative and competitive advantage

• FDI into non-triad regions:

– Tends to be concentrated in a few countries within each region.

– Still tends to be related to primary resources.

– There is a growing volume of manufacturing and service-related FDI.

• this is particularly true for a group of emerging markets or “newly-industrializing countries” (NICs), which have broken the cycle of underdevelopment to achieve economic growth and wealth-creation, partly through increased integration with other parts of the global economy.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.29

Shifting patterns of comparative and competitive advantage (Continued)

• Traditional trade theories can help explain current patterns of growth in emerging markets.

– The theory of absolute advantage suggests that each nation should

specialize

in producing goods it has a natural or acquired advantage in producing.

– The theory of comparative advantage holds that a relative advantage is all that is necessary for net gains from trade.

– The factor endowments theory allows us to look at the

relative availability

of different factors of production (land, labour and capital) and therefore their

relative

price in each country.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.30

The Flying Geese model

• Asian economies are following similar development paths, but are at different stages along this path, following the lead “goose”

Japan.

• Over time each country, or group, will gain and then subsequently loose specific comparative advantage in a particular industry.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.31

The Flying Geese model (Continued)

• In each country the transition is marked by a shift of employment from one sector to another, within the broader move from agriculture to manufacturing and then to services.

• Overall, rising skills and improved technological capabilities, increased capital investment and wage inflation (as predicted by the HOS model) drive and are driven by, the change process.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.32

The Flying Geese model (Continued)

• The timescale over which individual countries develop the economic conditions, resources and capabilities to specialize in a particular industry sector appears to be shortening.

• Comparative advantage between nations is also therefore shifting faster than in the past.

• Time it took to evolve into leading firms in their industries:

– Toyota and Sony (Japan): 30–35 years;

– Samsung (South Korea) and Acer (Taiwan): 20–25 years;

– WIPRO, Infosys and TCS (India):15–20 years.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.33

Figure 19.2

“Flying Geese” model: changing national-level specialization

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.34

Figure 19.3

“Flying Geese” model: the shifting location of industrial production

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.35

Figure 19.4

“Flying Geese” pattern of shifting comparative advantage

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.36

Figure 19.5

Accelerated structural transformation (are the geese flying faster?)

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.37

Criticism of Flying Geese model

• Many studies note that the sequential transfer of industrial specialization does not follow the same pattern in each country, or that it tends to be more of a parallel process whereby emerging economies seem to develop capabilities and grow exports across several industries at the same time.

• The example of the Indian IT and services industry also demonstrates that leapfrogging is possible. Here a less developed country (LDC) has evolved competitive advantages in an advanced service sector without going through the stages depicted by the model.

• However, some insights can be gained into the processes affecting the changing global locations of different industries and business activities and into the changing relatively competitive advantage between countries.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.38

Emerging economies as sources of innovation

• Traditional theories about the MNE tended to view the Triad a source of innovation and non-triad regions as recipients.

– The development of ‘‘national innovation systems’’ have made some emerging economies attractive to

R&D FDI from MNEs.

– This influx of high-technology investment further adds to the importance of emerging economies as sources of, rather than passive recipients of, innovation.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.39

Figure 19.6

Firm-specific advantages (FSAs) for the new multinationals

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.40

Market access to the triad

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.41

Market access to the triad

• Non-triad nations need both trade and investment with triad nations and also access to the markets of at least one of the triad regions.

• Access can be subject to complex arrangements with varying degrees of economic trade liberalization and protectionism that are inherent in the institutional and political structures of these regions.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

Slide 19.42

Market access to the triad

(Continued)

• The focus of business strategy for non-triad nation firms should be to secure inward triad investment and market access for exports to a triad bloc.

– Direct business contact of a double diamond type.

– Formal linkages arranged by the governments.

• “Clusters” of nations are making such arrangements with triad blocs. Some smaller, non-triad nations may attempt to open the doors to two triad markets.

– For example, both South Korea and Taiwan have equal trade and investment with the US and Japan.

Firms from these countries need two double diamonds.

Alan M Rugman and Simon Collinson,

International Business,

5 th

Edition, © Pearson Education Limited 2009

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